Neutral Citation Number: [2012] EWCA Civ 1002 Case Nos: C3/2011/3121, 3124, 3315, 3316 and 2012/0692 IN THE COURT OF APPEAL (CIVIL DIVISION) ON APPEAL FROM THE COMPETITION APPEAL TRIBUNAL MARCUS SMITH Q.C., PETER CLAYTON, PROFESSOR PAUL STONEMAN [2011] CAT 24 AND 26 Royal Courts of Justice Strand, London, WC2A 2LL Before: Date: 25 July 2012 LORD JUSTICE LLOYD LORD JUSTICE ETHERTON and LORD JUSTICE ELIAS - - - - - - - - - - - - - - - - - - - - - Between: (1) TELEFÓNICA O2 UK LTD (2) EVERYTHING EVERYWHERE LTD (3) VODAFONE LTD (4) HUTCHISON 3G UK LTD - and - BRITISH TELECOMMUNICATIONS PLC OFFICE OF COMMUNICATIONS Appellants Respondent Interested Party - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Jonathan Crow Q.C. and Robert O Donoghue (instructed by S J Berwin LLP) for the Appellant Telefónica O2 UK Ltd Jon Turner Q.C. and Philip Woolfe for the Appellants Everything Everywhere Ltd (instructed by Everything Everywhere Ltd), Vodafone Ltd (instructed by Herbert Smith LLP) and Hutchison 3G UK Ltd (instructed by Baker & Mackenzie LLP) Graham Read Q.C., Sarah Lee and Richard Eschwege instructed by BT Legal for British Telecommunications plc Javan Herberg Q.C. and Mark Vinall instructed by Ofcom for the Office of Communications Hearing dates: 1-3 May 2012 - - - - - - - - - - - - - - - - - - - - - Approved Judgment
Lord Justice Lloyd: Introduction 1. This judgment is given on several appeals from a decision of the Competition Appeal Tribunal (the Tribunal), itself on an appeal from determinations by the Respondent the Office of Communications (Ofcom) by way of the resolution of disputes under the Communications Act 2003 between, on the one hand, British Telecommunications plc (BT) and, on the other, a number of mobile telephone network operators. 2. If a person in the United Kingdom makes a phone call on his mobile telephone, the call is likely to be passed by the operator of the mobile phone network to which he subscribes to another operator in order to be connected to the person to whom the call is made. The chances are that BT will be involved in that process in one way or another. The general principle is that the caller pays for the call, and what he pays will depend on his contract with his network operator. However, when the call is passed from one operator to another a payment will fall to be made as between those two organisations. Because calls involving mobile phones are so very numerous, even small differences in the rate payable as between two operators may amount to large sums of money when applied to all relevant calls. The sector is regulated by Ofcom, largely under a system of regulation laid down by the European Union and known as the Common Regulatory Framework (CRF). A great deal of effort has been devoted to that regulatory process, in respect of the rates payable in these circumstances, and the parties involved have engaged large amounts of time and money on those processes, and in litigation arising from it, by way of appeals to the Tribunal and further appeals to the Court of Appeal. 3. The issue which led to these proceedings concerns the rates payable as between BT and four mobile network operators (the MNOs) in respect of calls to numbers beginning with 080, 0845 and 0871. Ofcom determined disputes between BT and the MNOs in two successive determinations, dated 5 February 2010 (for 080 numbers) and 10 August 2010 (for 0845 and 0871 numbers), deciding against BT in each case. BT appealed against those determinations. The Tribunal allowed those appeals in its judgment given on 1 August 2011, and gave a further judgment on consequential matters on 12 August 2011, disposing of the appeals by an order on that date. The Tribunal gave permission to appeal to the MNOs on a limited ground. More extensive permission to appeal was given to the appellants by the Court of Appeal (myself and Etherton LJ) on 15 February 2012: [2012] EWCA Civ 300. BT served a Respondent s Notice and applied for permission to cross-appeal on a particular point. I granted that permission in relation to the appellant Telefónica O2 but refused it in relation to the other MNOs, on 4 April 2012. 4. Thus we have before us four appeals, one by each of the MNOs, and a cross-appeal by BT against Telefónica O2 only. Telefónica O2 was represented before us by Mr Jonathan Crow Q.C., leading Mr Robert O Donoghue. The other three MNOs, Everything Everywhere, Hutchinson 3G and Vodafone, made common cause and were represented by Mr Jon Turner Q.C., leading Mr Philip Woolfe. Mr Crow and Mr Turner diverged to some extent in their submissions, but were able to avoid unnecessary repetition. BT was represented by Mr Graham Read Q.C., leading Ms Sarah Lee and Mr Richard Eschwege. Ofcom, as an interested party, was represented
by Mr Javan Herberg Q.C. and Mr Mark Vinall. I am grateful to all Counsel for their able and clear submissions. 5. Telephone numbers which begin with 08 may be on lines provided by BT or on lines provided by one of a number of other fixed network operators (including Cable & Wireless). They are different from numbers which begin with 01 or 02, and they are known as Non-Geographic Numbers. The distinction is drawn pursuant to a plan published by Ofcom called the National Telephone Numbering Plan ( the Plan ). Publication of the Plan is required of Ofcom by section 56 of the Communications Act 2003 ( the Act or the 2003 Act ). The Plan specifies 080 as the prefix for Special Services numbers, on which there is to be no charge to the customer, except where charges are notified to the customer at the start of the call. Numbers beginning 0845 are specified as Special Services basic rate, to be charged at BT s standard local call rate for BT customers (prices charged by other networks may vary), and 0870 calls in turn are to be charged, in effect, at the relevant network s normal national call rates except where different call charges have been published. I will have to say more about the sums payable in respect of calls to these three kinds of numbers. When a caller rings a non-geographic number the call is translated by the network to a geographic number to deliver the call to its destination. For this reason nongeographic numbers are sometimes called number translation services, or NTS, numbers. 6. The idea behind these NTS numbers, as appears from the Plan, was that the call should either be free to a caller on a BT line, or that the rate payable by the caller should be related to geographic call charges. For an 0845 number the organisation to which the call is made may be located far away from the caller, outside the scope of a local call, but the caller should expect to pay only the local rate. The difference is to be made up to the operator by the recipient of the call. Equally, for an 080 number, the recipient, offering a service to those interested in contacting it which is or may be free to the caller, can be expected to bear the cost of the call. 7. Calls to a small class of 080 numbers are operated entirely free to callers. These are to those starting with 080880, which are confined to certain charity helplines. It seems that calls on these numbers are free both to the caller and to the recipient, whatever networks are involved in making and transmitting the call. 8. Although Ofcom s Plan contains provisions about the rate of charges on calls to NTS numbers, it is not allowed to impose price controls by this means. Therefore, apart from those cases where by agreement there is no charge to the caller (as for the charity helplines mentioned above), there may be a charge, or a higher charge, to the caller, than is envisaged by the Plan. This explains the requirement, in respect of 080 numbers, for the caller to be told at the start of the call (if relevant) that there is a charge for the call. 9. Calls to NTS numbers from a fixed network telephone number are not the subject of these proceedings. The issues concern calls made to NTS numbers from a mobile network number. As with calls from a mobile telephone to geographic numbers on a fixed network, this will involve the use of at least two networks. All telephone users expect to be able to call any number from any telephone, regardless of what network is used by the caller or the recipient. This is known as end-to-end connectivity, and it is one of the objectives reflected in the CRF. In order to achieve this,
communications providers (CPs) enter into contractual arrangements with each other for the provision of access to each other s networks. In the simplest cases, where caller and recipient use different networks, two CPs are involved: the originating CP (OCP) and the terminating CP (TCP). In the case of calls other than to NTS numbers, the caller will pay a charge to his network, the originating CP, and that CP will pay a charge, known as the call termination charge, to the terminating CP. The charge is expressed in pence per minute, or ppm. BT, as the major fixed network CP in the UK, may also be involved even if it is neither the originating nor the terminating CP, because it provides transit services for calls between other CPs. In such a case BT will pay a termination charge to the terminating CP, but it will pass that on, as well as imposing fees or charges for the transit service, to the originating CP. The use of transit services makes it possible for a CP to ensure that all calls using its network can be connected, whatever other network may be involved, without having to enter into a separate contract with all other CPs that might possibly be relevant. It can rely on BT having made the necessary arrangements as an intermediary, so to speak. Nor is BT the only supplier of either call hosting or transit services; both Cable & Wireless and Opal Telecom, each of which participated before the Tribunal as an intervener, provide both fixed network services and transit services. There was evidence before the Tribunal that there is a good deal of competition between the providers of call hosting services, for the custom of service providers. Cable & Wireless and Opal may be following the present dispute with interest, but neither was involved in the hearing before the Court of Appeal. 10. BT provides connection services with its network to other CPs under the terms of its Standard Interconnect Agreement (SIA). The SIA, of which we saw a blank example, is a substantial document providing for the terms on which services are to be provided as between BT and the counterparty to the particular agreement (referred to as the Operator ), which is necessarily the provider of a public electronic communications network. One of the issues in the appeal turns on the terms and significance of the SIA. I will come to that in due course. It is an agreement which is open-ended in duration, and is capable of being terminated only on 24 months notice. Paragraph 12 is headed BT Services and paragraph 13 Operator Services. The SIA makes extensive reference to a Carrier Price List, which specifies charges payable both to BT by the Operator and by BT to the Operator. The SIA also provides for reviews (under paragraph 19) and for disputes (under paragraph 26). 11. Ofcom has a function and duty of resolving disputes, under section 185 of the Act. It is by virtue of that provision that the present issues came before Ofcom. It is common ground that its role in resolving such disputes is a regulatory role. That is clear from the legislation. The relevant parts of section 185 were, at the material time 1, as follows: 185 Reference of disputes to OFCOM (1) This section applies in the case of a dispute relating to the provision of network access if it is 1 The section has since been amended, as have other provisions relevant to this appeal. It was common ground before us that the issues turned on the unamended text, as set out and referred to here and elsewhere in this judgment.
(a) a dispute between different communications providers; (3) Any one or more of the parties to the dispute may refer it to OFCOM. (8) For the purposes of this section (a) the disputes that relate to the provision of network access include disputes as to the terms or conditions on which it is or may be provided in a particular case; 12. This provision, required under the CRF, replaced earlier legislation to similar effect which itself had a forerunner in the terms of BT s licence. The details of the previous provisions do not matter. 13. The most relevant provisions of the SIA, as they now stand, are paragraphs 12, 13 and 26. The parts of these paragraphs which are material are set out below in an Annex to the court s judgments. 14. The effect of the main provisions of the SIA is that the charge payable for a BT service or facility is specified by BT, and may be varied by BT by notice under paragraph 12.2. The variation takes effect in accordance with the notice, but the Operator may dispute the variation in accordance with the procedure under paragraph 26. If that does not produce an agreed solution it may be referred to Ofcom. If Ofcom rules against the variation, then BT must give effect to the ruling. By contrast, the price payable by BT for an Operator service or facility can be the subject of a Charge Change Notice served by the Operator under paragraph 13, but such a notice does not have effect to change the amount of the charge by itself. BT may give notice accepting the variation or rejecting it. For its part BT may request a variation of the charge for an Operator service or facility by a Charge Change Notice. If the requested change is agreed, then the parties are to enter into an agreement recording the change. If it cannot be resolved by agreement, either party may refer the dispute to Ofcom, whose ruling will determine what, if any, change shall take effect. BT placed a good deal of reliance on the difference between the effect of a notice under paragraph 12 and that of a notice under paragraph 13. 15. The SIA does not define a BT service or facility nor an Operator service or facility. The distinction which appears from paragraphs 12.1 and 13.1 lies in the identity of who is to pay for the service or facility. If the Operator pays, it is a BT service or facility, and if BT pays it is an Operator service or facility. Only BT can alter the charge for a BT service or facility by notice under paragraph 12 (though subject to the dispute resolution provisions of paragraph 26), whereas both the Operator and BT can propose a change to the charge for an Operator service or facility, under paragraph 13.2 and 13.3. The possibility of a change being proposed by BT as well as by the Operator may have some relevance to the fact that a change notice under paragraph 13 does not have automatic effect, even if served by the Operator.
16. As well as these provisions, paragraph 19 allows a party to seek to amend the agreement by serving on the other a review notice, in certain events, (including a general review, but in that case only at specified times, with a window of three months every two years). Upon service of a review notice, the parties are to negotiate in good faith, but if agreement cannot be reached within a given time, Ofcom may be asked to resolve the dispute. 17. The situation that led to the determination by Ofcom from which the appeals to the CAT and to this court arise may be described, in brief, as follows. 18. Before November 2008, for 080 calls, BT included a negative rate of charge in the Carrier Price List: -0.6261 (daytime), -0.2866 (evening) and -0.2257 (weekend). This meant that BT paid a charge to the originating CP, rather than receiving a charge from the originating CP, in respect of calls originated on another network (whether fixed or mobile) and terminated on BT s network. As from November 2008 BT changed this position by a notice called Network Charge Change Notice (NCCN) 911, so that it made these payments only to fixed network CPs but made no such payments to mobile network CPs. Mobile network CPs continued to charge their own customers for such calls. NCCN 911 is only relevant as part of the history. 19. In June 2009 BT issued NCCN 956, to come into effect on 1 July 2009. It introduced a novel method of pricing, described by BT itself as a radical departure from the existing pricing practice, and by Ofcom as representing a substantial change in the approach to termination charges for NTS numbers: see Ofcom s second determination, paragraph 9.45, quoted in the Tribunal s decision at paragraph 171(3). Under this notice, if no retail charge was payable by the originating CP, then negative charges applied, so that BT paid the originating CP (whether a fixed or a mobile operator) an origination charge for calls originated on another network and terminated on BT s network. If the retail charge payable by the originating CP s customer was more than nil but less than 8.5 ppm, then nothing was payable either by or to BT by way of origination charge or termination charge. If the retail charge was 8.5ppm or more, but less than 12.5 ppm, then the originating CP was to pay BT a termination charge at the rate of 2 ppm for all such calls. Successively higher rates applied if the retail charge exceeded 12.5 ppm, or 17.5 ppm, or 22.5 ppm, or 27.5 ppm. This structure was described as ladder pricing. So far as the introduction of the successive layers of termination charge was concerned, the Tribunal observed that this amounted to a variation imposed by BT under paragraph 12.2 of the SIA, and they said at paragraph 74 that this had been common ground before them. 20. Later in 2009, BT served NCCN 985, to take effect on 1 November 2009, in respect of 0845 calls. This introduced charges on a similar ladder structure, though this involved a positive termination charge in all cases. Where the retail charge payable by the originating CP s customer was less than 12.5 ppm, then there was no change to the rate of the termination charge payable. If the retail charge payable was higher then the termination charge was varied to be higher in turn, and successively so in five bands. 21. At the same time BT served NCCN 986 in respect of 0870 calls. In this case too there was a positive termination charge in all cases, but if the originating CP s retail charge was less than 12.5 ppm, there was no change to the rate. If the retail charge was
higher, then the termination charge was to be higher, again successively so in five bands. 22. In each of these three cases, the MNOs disputed BT s NCCN, and referred the matter to Ofcom. Ofcom determined the dispute about the 080 numbers, under NCCN 956, on 5 February 2010. In turn it determined the dispute about the 0845 and 0870 numbers, NCCN 985 and 986, on 10 August 2010. In each case it rejected BT s variation of the charges. BT appealed against those determinations to the Tribunal, and succeeded in its appeals. Hence the further appeals by the MNOs. 23. In the course of the proceedings before the Tribunal a dispute arose as to whether BT was entitled to adduce evidence before the Tribunal that had not been before Ofcom. The Tribunal decided that in favour of BT, and that conclusion was confirmed by this court on an appeal by Ofcom: British Telecommunications plc v Office of Communications [2011] EWCA Civ 245. As a result, the hearing before the Tribunal was the more substantial, with evidence from eleven witnesses, and it lasted over eleven days. The CRF relevant provisions 24. Since the issue before us is as to the correctness or otherwise of Ofcom s resolution of the disputes under section 185, it is necessary to have clearly in mind the nature of the dispute resolution procedure, which is laid down in accordance with the CRF. 25. Two Directives forming part of the CRF are relevant in the present case: the Framework Directive, Directive 2002/21/EC, on a common regulatory framework for electronic communications networks and services, and the Access Directive, Directive 2002/19/EC, on access to, and interconnection of, electronic communications networks and associated facilities. Interconnection is the feature which is central to these appeals. That is at the heart of all relevant regulatory decisions in this area. 26. Recitals to the Framework Directive record that the convergence of the telecommunications, media and information technology sectors means all transmission networks and services should be covered by a single regulatory framework (recital 5), that ex ante regulatory obligations should be imposed only where there is not effective competition and where national and Community competition law remedies are not sufficient to address the problem (recital 27), and that, in the event of a dispute between undertakings in the same Member State in an area covered by the CRF, an aggrieved party that has negotiated in good faith but failed to reach agreement should be able to call on the national regulatory authority to resolve the dispute (recital 32). That recital states in terms that national regulatory authorities should be able to impose a solution on the parties and that the intervention of a national regulatory authority in the resolution of a dispute between undertakings providing electronic communications networks or services in a Member State should seek to ensure compliance with the obligations arising under the CRF. Definitions in the Framework Directive include those of user, as a legal entity or natural person using or requesting a publicly available electronic communications service, and consumer as any natural person who uses or requests a publicly available communications service for purposes which are outside his or her trade, business or profession.
27. The Directive assigns tasks to a national regulatory authority (NRA) in each Member State, and requires Member States to see that these tasks are undertaken by a competent body. By article 8, it requires Member States to ensure that, in carrying out the relevant regulatory tasks, the NRA takes all reasonable measures aimed at achieving the objectives set out in article 8, those measures being proportionate to those objectives. The relevant objective for present purposes is that set out in paragraph 2 of article 8, as follows: 2. The national regulatory authorities shall promote competition in the provision of electronic communications networks, electronic communications services and associated facilities and services by inter alia: (a) ensuring that users, including disabled users, derive maximum benefit in terms of choice, price, and quality; (b) ensuring that there is no distortion or restriction of competition in the electronic communications sector; (c) encouraging efficient investment in infrastructure, and promoting innovation; and (d) encouraging efficient use and ensuring the effective management of radio frequencies and numbering resources. 28. Article 20 of the Directive deals with dispute resolution; paragraphs 1 and 3 are of particular relevance: 1. In the event of a dispute arising in connection with obligations arising under this Directive or the Specific Directives between undertakings providing electronic communications networks or services in a Member State, the national regulatory authority concerned shall, at the request of either party, and without prejudice to the provisions of paragraph 2, issue a binding decision to resolve the dispute in the shortest possible time frame and in any case within four months except in exceptional circumstances. The Member State concerned shall require that all parties cooperate fully with the national regulatory authority. 3. In resolving a dispute, the national regulatory authority shall take decisions aimed at achieving the objectives set out in Article 8. Any obligations imposed on an undertaking by the national regulatory authority in resolving a dispute shall respect the provisions of this Directive or the Specific Directives. 29. The Access Directive includes some relevant recitals, such as (5) which records that in an open and competitive market, there should be no restrictions that prevent undertakings from negotiating access and interconnection arrangements between themselves, in particular on cross-border agreements, subject to the competition rules of the Treaty and that in the context of achieving a more efficient, truly pan- European market, with effective competition, more choice and competitive services to
consumers, undertakings which receive requests for access or interconnection should in principle conclude such agreements on a commercial basis, and negotiate in good faith. Recital (6) refers to the need, in given circumstances, for the NRA to be able to ensure end-to-end connectivity by imposing proportionate obligations, and in turn recital (8) refers to the need, in relation to network operators who control access to their own customers on the basis of unique numbers or addresses from a published numbering or addressing range, for other network operators to be able to deliver traffic to those customers, and so to be able to interconnect directly or indirectly to each other. Recital (9) identifies the benefit to end-users of interoperability, and states that it is an important aim of the CRF, and that one of the objectives of NRAs is to encourage interoperability. The recitals also display a concern to avoid overregulation, as in recitals (13) and (14). 30. Turning to the operative provisions, article 1.1 sets out the aim of the Directive: The aim is to establish a regulatory framework, in accordance with internal market principles, for the relationships between suppliers of networks and services that will result in sustainable competition, interoperability of electronic communications services and consumer benefits. 31. In line with this aim, article 3.1 requires Member States to ensure that there are no restrictions which prevent undertakings in the same Member State or in different Member States from negotiating between themselves agreements on technical and commercial arrangements for access and/or interconnection, in accordance with Community law. In turn article 4.1, dealing with rights and obligations for undertakings, says this: Operators of public communications networks shall have a right and, when requested by other undertakings so authorised, an obligation to negotiate interconnection with each other for the purpose of providing publicly available electronic communications services, in order to ensure provision and interoperability of services throughout the Community. 32. Article 5 deals with the powers and responsibilities of NRAs with regard to access and interconnection. Paragraph 4 is as follows: With regard to access and interconnection, Member States shall ensure that the national regulatory authority is empowered to intervene at its own initiative where justified or, in the absence of agreement between undertakings, at the request of either of the parties involved, in order to secure the policy objectives of Article 8 of Directive 2002/21/EC (Framework Directive), in accordance with the provisions of this Directive and the procedures referred to in Articles 6 and 7, 20 and 21 of Directive 2002/21/EC (Framework Directive).
The 2003 Act 33. The CRF is implemented in the UK by the 2003 Act, so far as relevant. The first part of the Act deals with Ofcom. Section 3 sets out its general duties when carrying out its functions. The provisions material for our purposes are these: 3(1) It shall be the principal duty of OFCOM, in carrying out their functions (a) to further the interests of citizens in relation to communications matters; and (b) to further the interests of consumers in relevant markets, where appropriate by promoting competition. (3) In performing their duties under subsection (1), OFCOM must have regard, in all cases, to (a) the principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed; and (b) any other principles appearing to OFCOM to represent the best regulatory practice. (4) OFCOM must also have regard, in performing those duties, to such of the following as appear to them to be relevant in the circumstances (b) the desirability of promoting competition in relevant markets; (d) the desirability of encouraging investment and innovation in relevant markets; (6) Where it appears to OFCOM, in relation to the carrying out of any of the functions mentioned in section 4(1), that any of their general duties conflict with one or more of their duties under sections 4, 24 and 25, priority must be given to their duties under those sections. 34. Citizens, in paragraph (a) of section 3(1), means all members of the public in the UK: see section 3(14). Consumers in relevant markets, in paragraph (b), is defined by section 405(5). In relation to a market for the kind of service with which we are concerned its principal meanings are, first, persons to whom the service is provided, made available or supplied (whether in a personal capacity or for the purposes of their business) and, secondly, persons who wish to come into that category, or whom the supplier of the service wishes to bring into that category. These definitions are not the
same as those of user and consumer in the Framework Directive, set out at paragraph [26] above. In terms of the Framework Directive definitions, consumers are those who wish to make telephone calls, not for business purposes, on NTS numbers, whereas users include callers (not limited by excluding business calls) but also service providers who do, or wish to, offer an NTS number to their callers. Both of these categories are within the definition in the Act of consumers in the relevant market. 35. The duties arising under the CRF are dealt with in terms in section 4, of which the following provisions are of particular relevance: 4(1) This section applies to the following functions of OFCOM (c) their functions under Chapter 3 of Part 2 in relation to disputes referred to them under section 185; (2) It shall be the duty of OFCOM, in carrying out any of those functions, to act in accordance with the six Community requirements (which give effect, amongst other things, to the requirements of Article 8 of the Framework Directive and are to be read accordingly). (3) The first Community requirement is a requirement to promote competition (a) in relation to the provision of electronic communications networks and electronic communications services; (b) in relation to the provision and making available of services and facilities that are provided or made available in association with the provision of electronic communications networks or electronic communications services; (7) The fifth Community requirement is a requirement to encourage, to such extent as OFCOM consider appropriate for the purpose mentioned in subsection (8), the provision of network access and service interoperability. (8) That purpose is the purpose of securing (a) efficiency and sustainable competition in the markets for electronic communications networks, electronic communications services and associated facilities; (b) the maximum benefit for the persons who are customers of communications providers and of persons who make such facilities available.
(11) Where it appears to OFCOM that any of the Community requirements conflict with each other, they must secure that the conflict is resolved in the manner they think best in the circumstances. 36. I have already set out section 185 as regards dispute resolution, which implements the obligations in article 20 of the Framework Directive: see paragraph [11] above. I will turn later to the provisions about appeals. Ofcom s decisions 37. There were differences of approach between Ofcom s two relevant decisions. In practice, it is possible and appropriate to consider only the later determination, for most purposes of the appeals, on the basis that, to the extent that it differs, it should be regarded as having superseded the earlier. 38. Ofcom said that their task in determining the dispute was to decide whether it was fair and reasonable for BT to apply new termination charges for calls to the relevant numbers hosted on its network, based on the level of the retail charge made by originating CPs for calls to these numbers, as set out in BT s relevant NCCNs. They adopted an analytical framework for assessing the matter in dispute based on three cumulative principles, concerned with pricing and cost recovery. These three principles were as follows: i) The MNOs should not be denied the opportunity to recover their efficient costs of originating calls to the relevant numbers hosted on BT s network. In practice that meant that it was not fair or reasonable for BT to impose variable termination charges unless the average retention by each of the MNOs (the average retail price minus the termination charge) is sufficiently large relative to the retention obtained on geographic calls. ii) iii) The charges imposed in the NCCNs should (a) provide benefits to consumers, taking into account (i) the impact on retail prices of calls to the relevant numbers (the Direct effect) (ii) the impact on service providers and, through improved services, callers, i.e. consumers of such calls (the Indirect effect) and (iii) the impact on the overall MNO offering to its customers (the Mobile Tariff Package effect), and also (b) avoid a material distortion of competition among terminating CPs, transit operators, originating CPs in retail services and MNOs in wholesale sales to Mobile Virtual Network Operators (MVNOs). The changes in the NCCNs should be reasonably practical to implement. 39. These principles incorporated six principles of pricing and cost recovery which Ofcom had often used before for this purpose: cost causation, cost minimisation, effective competition, reciprocity, distribution of benefits and practicability. Neither the Tribunal nor any party before us criticised Ofcom for the use of these principles, though the Tribunal was critical of the formulation of the second principle. The dispute turned mainly on their application of the principles.
40. Ofcom s conclusion, in their second determination, was that the first principle was satisfied, but that neither the second nor the third principle was satisfied. In the first determination, however, they had concluded that the third principle was satisfied. That view prevailed with the Tribunal, and is not now in issue. I can therefore limit myself to what was said about the second principle. Ofcom summarised their conclusion on this at paragraphs 1.23 to 1.26 of the second determination, as follows: Our final conclusion on Principle 2 1.23 Principle 2 relates to consumer and competition effects. Our final conclusion that Principle 2 is not met, for the following reasons: Consumer effects 1.24 As set out in the Supplementary Consultation, we consider that it is more likely that NCCNs 985 and 986 will lead to price decreases for 0845/0870 calls rather than price increases. This represents a change from our provisional conclusion in the Draft Determination. However, we are still uncertain about the magnitude of the Direct effect and still consider that there will be a negative Mobile tariff package effect, which leads us to consider that there is a risk of an overall adverse effect on consumers. We consider it reasonable, in light of our overriding statutory duties to further the interests of consumers, to place greater weight on this potential risk than on the potential benefits of allowing the charges in NCCNs 985 and 986 to stand. Competitive effects 1.25 Our final conclusion is the same as our provisional conclusion in the Draft Determination. The risk of competitive distortions between TCPs is relatively low and there may be no significant distortion to competition in MNOs wholesale sales to MVNOs. However, there are possible concerns about the potential distortion of OCPs choice of transit provider, and about competition between MNOs and MVNOs in retail services (relating to disincentives to pricing innovations and potential for the range of retail packages to be reduced, although the nature of these effects depends on the method to derive the MNOs average retail price). Overall view 1.26 Taking the issues raised by our analysis of consumer benefits and competitive distortion in the round, we consider that, on the evidence currently before us, Principle 2 is not sufficiently likely to be met. A more detailed statement of our conclusion on Principle 2 is set out in Section 9 below. 41. It is also worth seeing how they expressed their conclusion in Section 9, where they summarised their analysis and stated their final conclusions on whether the NCCNs were fair and reasonable. At paragraphs 9.31 and 9.32 they said this:
9.31 Our judgement in respect of Principle 2 is therefore finely balanced. We recognise the possibility that consumers could benefit from NCCNs 985 and 986. However we also recognise the risk of harm to consumers from NCCNs 986 and 986, particularly in the light of our conclusions on the Mobile tariff package effect. 9.32 Given the uncertainty which we have identified as to whether BT s NCCNs would result in a net benefit or net harm to consumers, and in light of our overriding statutory duties to further the interests of consumers, we consider it appropriate for us to place greater weight on this potential risk to consumers from NCCNs 985 and 986. 42. To expand a little on the three effects which Ofcom considered for the purposes of the second principle, the Direct Effect is that of driving down the retail prices payable by consumers for the relevant calls. If that were a result of the ladder pricing structure, it would clearly be of benefit to consumers. The Indirect Effect could arise if BT were to pass on part of the benefit to it of any additional revenue which it would receive from its increased prices to service providers, that is to say the recipients of the relevant calls, and if they in turn were to use some of that money to improve their own services as provided to callers. The Mobile Tariff Package Effect is sometimes known as the waterbed effect, because it takes into account the possibility that, if the return to an MNO from a particular service is reduced, whether by a reduction of its own charges or by an increase in charges which it has to bear, it may compensate for that by increasing other charges to consumers. 43. In effect, Ofcom considered that it was likely that there would be some direct benefit through a reduction in prices to consumers for the relevant calls, but it could not quantify that benefit, that there might be some indirect effect, but that this was even more difficult to quantify, and that there would be a significant (though not quantifiable) adverse waterbed effect, leading overall to a risk of an adverse effect on consumers. They considered that for this reason they should not uphold BT s new charges as fair and reasonable. The Tribunal s decision 44. On BT s appeal to the Tribunal, one of its contentions was that the prices charged by the MNOs were excessive and represented market failure. The Tribunal rejected the contention as to excessive prices (paragraph 125) but both Ofcom and the Tribunal accepted that there were symptoms of market failure. We were shown a consultation document issued by Ofcom in relation to NTS numbers, which discusses the limitations on the way in which this market operates, particularly because of lack of transparency and lack of awareness on the part of callers of the price payable for NTS calls made from mobile phones. This also underlies Ofcom s policy preference as regards charges for calls to NTS numbers, and in that way it featured in Ofcom s analysis of the likely effects of the new charging structure on consumers. However, overall the analysis on this aspect was itself inconclusive. Therefore, attention on the appeal was focussed on other aspects of the effect of BT s new charges on consumers. 45. For this purpose the Tribunal devoted a substantial part of the decision to a welfare assessment, that is to say an assessment of the economic effects of the introduction of the ladder pricing structure, and whether these economic effects would be beneficial
or otherwise to consumers (see paragraph 280). In the course of their welfare assessment, the Tribunal said that Ofcom s conclusion about the Direct Effect was correct: retail prices for these calls would fall but it was impossible to tell by how much (paragraphs 343-4). They held that the Indirect Effect was even more uncertain than the Direct Effect, and that Ofcom should not have paid even as little attention as it did to this factor in assessing possible benefits to consumers (paragraphs 347-9). As regards the Waterbed effect, the Tribunal held that it would be significant but impossible to quantify (paragraph 364). In summary, at paragraph 379 the Tribunal said this: Fundamentally, the welfare analysis is inconclusive, due to a lack of empirical evidence. Even with the assistance of the simplifying assumptions that we have described, a reliable assessment of elasticity of demand is not possible. Whilst it is possible to conclude that prices for 080, 0845 and 0870 calls will, on balance, fall, it cannot be said how far they will fall, nor what volumes of calls there will be at any given price. Equally, the extent of the Mobile Tariff Package Effect is essentially unknown. 46. Ofcom had held that there was a risk of adverse effect on consumers. The Tribunal put it more neutrally, that the assessment of benefits and otherwise was inconclusive. Either way, it was impossible to show that the change would, or would be likely to, benefit consumers, overall. That is sufficient to show that BT did not succeed in making out its contention that the changes would be of benefit to consumers. 47. The next part of the Tribunal s decision is headed The effect on competition. In the course of this the Tribunal referred to the position as between BT and other terminating CPs. At paragraph 392 they made this observation: The ability to price differently, and to introduce innovative pricing structures, is a key aspect of competition between suppliers. If too restrictive a test is imposed on the introduction of innovative pricing structures, then competition will not be enhanced, but restricted. 48. This led the Tribunal to identify an issue as to the right approach for a regulator, and to criticise Ofcom s determination accordingly, in paragraphs 395 to 397, as follows: 395. It is clear that, in promulgating a stringent test that must be satisfied before BT can introduce its NCCNs, which will be applied to other terminating CPs should they seek to introduce similar measures, OFCOM is significantly restricting communication providers commercial freedom to price which absent the Dispute Resolution Process is not constrained by regulation. It might be said that a test that simply seeks to assess whether a price change provides benefits to consumers (Principle 2(i)) and does not materially distort competition (Principle 2(ii)) is not especially stringent. But that is to overlook the lack of empirical evidence as to what BT s pricing would do in this market, and the sheer difficulty (in the absence of such evidence) of demonstrating through modelling that the NCCNs would be beneficial to consumers.
396. The crucial question is what is a regulator to do in the context of such uncertainty? Essentially, the regulator has two choices: (1) To prevent change unless it can be demonstrated that the change is beneficial in which case it may well be said that the dead hand of regulation is constraining behaviour which may actually be beneficial to consumers. We stress that our conclusion regarding Principle 2(i) was that the welfare assessment was inconclusive, not that consumers would be harmed. (2) Alternatively, to allow change despite the uncertainty, even though there is a risk that the change may result in a disbenefit to consumers, recognising that an undue fetter on commercial freedom is itself a disbenefit to consumers. 397. In the Determinations, Ofcom clearly opted for the first choice. But it did so without articulating or considering the alternative. We consider that this is a matter that Ofcom should have considered during the course of its Determinations. 49. Moving to the last section of the decision, at paragraphs 416 to 418 the Tribunal listed eleven potentially relevant factors, of which they had discarded two as irrelevant. They said that several that were relevant had been properly taken into account by Ofcom. These included Ofcom s general statutory obligations under the 2003 Act, their policy preference as regards the relevant calls (namely the approach set out in the Plan, described at paragraph [5] above), their welfare assessment, the ability of MNOs to recover their efficient costs, and questions of practicality. However, at paragraph 418 they said that Ofcom had not taken properly into account three relevant factors: BT s rights under the SIA, the regulatory obligations and duties on the parties to the dispute, and the effect on competition. They also identified as relevant (at paragraph 419) the nature of the dispute resolution process, and the need for Ofcom to be able to resolve disputes satisfactorily within the four month time limit imposed by the legislation. 50. The Tribunal approved Ofcom s use of the three principles, by way of an analytical framework, but they were critical of the formulation of Principle 2 as set out at paragraph [38(ii)] above. At paragraph 440 they commented that it did not make clear what should be the relationship between benefits to consumers, on the one hand, and avoiding material distortion of competition on the other, and also that it did not take into account BT s contractual rights under the SIA. 51. The Tribunal considered that to introduce ladder pricing would not distort competition, and said that the imposition of a stringent test for the introduction of price changes by BT would itself distort competition by restraining the pricing freedom of BT and other terminating CPs (see paragraph 442). They went on: We are mindful that price control is an intrusive form of control which, elsewhere in the 2003 Act, can only be introduced by SMP condition. None of the parties to the dispute were subject to regulatory control as regards the prices for 080, 0845 or 0870 calls nor as regards the prices for terminating such calls.
52. They said that these were powerful indicators in favour of allowing BT to introduce the new prices (paragraph 443). 53. As regards BT s contractual rights under the SIA, they considered that it was within BT s contractual rights to impose the NCCNs on the MNOs, and although these rights could be modified by the regulatory regime, including by conditions imposed where an undertaking has significant market power (SMP), and although the dispute resolution process could override contractual rights, nevertheless, first, contractual rights are relevant factors to be taken into account and, secondly, BT s rights under paragraph 12 of the SIA point in the direction of allowing BT to introduce the new prices : see paragraph 444. 54. Those points related to the second aspect of principle 2. As to the first, the Tribunal recognised that the result of the welfare assessment was that it could not be said that the NCCNs did provide benefits to consumers. They went on as follows, at paragraphs 447 and 448: 447. If, therefore, the test to be applied is whether the NCCNs can be shown to provide benefits to consumers, then that test is not met. However, we do not consider this to be the correct test in the circumstances of the present case, because it places undue importance on OFCOM s policy preference, at the expense of the two other relevant factors that we have identified as forming a part of Principle 2 (namely Principle 2(ii) and BT s private law rights). 448. We consider that whilst OFCOM s welfare analysis could override these other factors, it should only do so where it can clearly and distinctly be demonstrated that the introduction of the NCCNs would act as a material disbenefit to consumers. In short, given the presence of the two other factors that we have identified, it is not enough for the welfare analysis to be simply inconclusive. The welfare analysis must demonstrate, and demonstrate clearly, that the interests of consumers will be disadvantaged. 55. On that approach, the Tribunal held that to require BT to show that the NCCNs would be of benefit to consumers would involve an undue pre-disposition in favour of the status quo, to the detriment of other legitimate interests, whereas the Tribunal s preferred approach would avoid excessive focus on economic analysis where such analysis is intrinsically equivocal (paragraph 449). For those reasons the Tribunal held that the three NCCNs were fair and reasonable, that BT had the right to introduce them, and that BT s appeal should succeed (paragraph 450). They directed Ofcom to allow the three NCCNs to stand. 56. Consequential issues arose from the fact that they had not been allowed to stand in the meantime, and there are issues on the appeal which arise from that aspect of the matter, but I need not deal with those at this stage. 57. Thus, three particular factors require attention as underlying the Tribunal s decision: the nature and relevance of BT s contractual rights, the relevance of competition as a goal in itself, and thus of any distortion of competition, and the Tribunal s view as to regulatory absence in a dispute resolution process.
Dispute resolution by Ofcom 58. At this point I will say something, first, about the nature of the dispute resolution process and secondly about appeals to the Tribunal. I have already set out section 185 under which the power to resolve disputes arises (see paragraph [11] above), as well as the provisions of the CRF Directives which require and govern that provision. I will mention briefly some supplementary provisions in the Act. At the time when Ofcom accepted the disputes that are relevant to this appeal, they had no choice under the Act but to accept those disputes for resolution unless satisfactory alternative means for resolving the dispute were available. Under section 188, if they decide that it is appropriate for them to resolve the dispute, they must consider the dispute, according to the procedure which they think appropriate, and make a determination resolving it, and they must do so as soon as practicable and, otherwise than in exceptional circumstances, within four months of the decision that they should resolve it. Ofcom s powers, when resolving a dispute, are set out in section 190: (2) Their main power is to do one or more of the following (a) to make a declaration setting out the rights and obligations of the parties to the dispute; (b) to give a direction fixing the terms or conditions of transactions between the parties to the dispute; (c) to give a direction imposing an obligation, enforceable by the parties to the dispute, to enter into a transaction between themselves on the terms and conditions fixed by OFCOM; and (d) for the purpose of giving effect to a determination by OFCOM of the proper amount of a charge in respect of which amounts have been paid by one of the parties of the dispute to the other, to give a direction, enforceable by the party to whom the sums are to be paid, requiring the payment of sums by way of adjustment of an underpayment or overpayment. 59. As already mentioned, there have been a good many instances of dispute resolutions by Ofcom, and several appeals to the Tribunal. One case which is of particular significance is known as the TRD case (short for Termination Rate Dispute): T- Mobile (UK) Ltd v Office of Communications [2008] CAT 12. In that decision the Tribunal gave some general guidance as to Ofcom s functions. There Ofcom had declined to interfere with proposals by the MNOs as to the termination charges payable, and the Tribunal said that they had erred by failing to recognise that dispute resolution was a third potential regulatory restraint that operates in addition to other ex ante obligations and ex post competition law. 60. In paragraph 101 of their decision in the TRD case, the Tribunal said this, describing the test that Ofcom should adopt: That test can be expressed as requiring OFCOM to determine what are reasonable terms and conditions as between the parties. The word reasonable in this context means two things. First it requires a fair